The home heating oil industry has a long and proud history, and Fuel Oil News has been there supporting it since 1935. It is an industry that has faced many challenges during that time. In its 77th year, Fuel Oil News is doing more than just holding
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26 JuLY 2014 FuEL OIL NEWS | www.fueloilnews.com I n June the 2014 VISIONS Conference was held in Worcester, Mass., and given the time of year and the regular rush to provide programs, the confer- ence offered an excellent seminar on markets and hedging strategies entitled "Hedging in the Ultra- Low Sulfur Marketplace." James Townsend, CEO of Townsend Energy of Massachusetts and New Hampshire, moderated the panel of distinguished experts. Speaking, in order of presentation, were: • Daniel Brusstar, senior director, CME Group • Elaine Levin, president, Powerhouse • Philip Baratz, president Angus Energy • Rich Larkin, president, Hedge Solution Presentations by each, sans Powerpoint for the most part, began with Brusstar describing the winter of 2013-2014 as the first year for an ultra-low sulfur diesel contract, and described the transition to ULSD as "progressing," also noting that states were phasing in the spec product over time and that the trend was toward "faster transition to ULS standards." Levin noted that oil prices have been trading in a range between $2.80 and $3.20 since 2011. Buying in the lower half of the range has been a good strategy. Price volatility has diminished and with it a sharp drop in the cost of options. At-the-money distillate fuel oil options are now running around 12.5 cents-per-gallon compared with 30 to 40 cents just a few years ago. Puts, used to protect wet barrels against loss of value if prices should fall, can be had for as low as 7 cents-per-gallon with a $2.80 strike. This would provide protection if the market were to break below the trading range. Levin urged dealers to avoid complacency. "The mar- ket is flat as a pancake," she said. "I doubt you will find better deals on options than exist now. I'd be getting my winter program in place now." Baratz also noted this past winter as a "year of transition" with respect to the move from 2,000 ppm, toward a marketplace with 500ppm and 15ppm, but noted that interruptible natural gas "shocked mar- kets" as natural gas failed to keep up with demand. In terms of the transition to 15ppm, Baratz said that wholesale suppliers will supply the market "as if fuel is ULS" (not LS). Larkin started with saying that he is "big on accounting," and discussed the mechanisms nec- essary to track basis costs and margins, noting that years ago he accomplished this using spreadsheets in Microsoft Excel, but now his company's platform, known as Hedge Insight, does the heavy lifting. For the coming winter Larkin agreed with Levin and Baratz, stating that marketers should not "knee jerk to one year of basis blowout," pointing out that the 500ppm to 15ppm transition is still a mix of logisti- cal issues, and blowouts can and will happen if the markets cannot get what they need (via imports) to blend. Also, Larkin said that there has never been a basis blowout before January—except 1989—and that blowouts tend to increase in February, March and April. Larkin noted that "consumer fatigue" for programs is an issue, citing budget accounts as the "gold standard" for programs as budget cus- tomers stay with retail marketers an average of 13 to 14 years. There was consensus that there are "finite supply options" and that imports will be necessary, even if the coming winter is warm. Cited, as an example, were the current differences in specs among New York, New Jersey and Pennsylvania, which, in the words of one "could not make it more different or difficult." Also, all agreed that suppliers will be pricing product as it were all 15ppm, at least for the time being. l FON Bio: Shane Sweet is an energy and management consultant with clients in the heating oil, propane and motor fuel sec- tors and is a partner with the firm of Lake Rudd & Company. He served the industry as president & CEO of the New England Fuel Institute "NEFI" from 2007 to 2011, and as EVP/director and lobbyist for the Vermont Fuel Dealers Association "VFDA" from 1993 to 2007. CoNTACT: He lives in Shaftsbury, Vt., and may be reached at shanemsweet@gmail.com or 802-558-6101 cell/text. Suggestions by readers for future column content, as well as general comments, are welcome. Shane Sweet OPERATIONAL INSIGHT VI-SION (ˈviZHˈn/)